CHAPTER 1

INTRODUCTION

1.1 Definition of sales promotions

Sale promotions are a diverse collection of incentive tools designed to stimulate faster
and / or larger purchases of products or services by consumers or the trade (Kotler 1997,
p.664). The core difference between advertising and sales promotion is - advertising offers a
reason to buy, sales promotion offers an incentive to buy. Both advertising and sales
promotions are instruments in the marketing communication mix. This mix also includes
personal selling, direct marketing tools, public relations, and publicity.

Sales promotions consist of tools for consumer promotion, trade promotion, and sales
force promotion. Consumer promotions are aimed at final consumers. These promotions are
initiated by either manufactures or retailers. Well-known examples include temporary prices
cuts, discounts, volume offers, buy x get y free, sweepstakes, free trials, and coupons. Trade
promotions are aimed at retailers by manufactures. Examples of trade promotions are price
reductions, advertising and display allowance, and free goods. Sales force promotions are
aimed at the sales force of manufacturers. An example is a contest for sales representatives.

This thesis focuses on measurement of consumer promotion effects. Specifically, we

measure aggregate consumer response, at the store level, to sales promotions offered by
retailers. “Sales Promotions” should be read as “consumer Promotions” in the remainder of
this thesis. We also use ‘promotions” and “sales promotions” interchangeably. Consumer
promotions are often paid at least partially by manufactures. That is, retailers pass a certain
amount of the trade promotion through to consumers. Thus, the trade promotion allowances
offered by manufactures to retailers may be converted to temporary price cuts, special
displays, etc. in the stores.

Sales promotion as a technique of promotion has been developed to supplement and

coordinate advertising and personal selling efforts of a firm. It is any short-term incentive
used by a firm to increase the sales of its product. It consists of all those promotional
activities that help in enhancing sales through non-repetitive and one-time communication. It

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is aimed at stimulating market demand and consumer purchasing. It focuses the selling efforts
on a selected small group of people. A firm undertakes sales promotion with the following
objectives:-

ƒ To introduce new products and to acquaint the customers how to use the product
ƒ To acquaint the customers about the utility of the product
ƒ To effect spot buying and to attract new customers
ƒ To increase sales during slack periods and to increase profits of the firm
ƒ To improve the public image/goodwill of the firm

The important sales promotion methods are:-

ƒ Distribution of free samples: - is an expensive but powerful tool of sales promotion

used to gain consumer acceptance and to popularize the product. It is an effective
device of sales promotion as the consumers can test the product before buying it. The
sample may be delivered door to door, offered in retail stores or fairs. This device is
suitable for introducing new products such as soaps, drugs, cosmetics, perfumes, tea,
etc.
ƒ Coupons: - is a certificate that entitles its holder to a specified saving or discount on
the purchase of a particular product. The customers present their coupons to retailers
and get the product at a much reduced price. Coupons may be issued by the
manufacturers either directly by mail or through the dealers. They are also issued
through newspapers and magazines.
ƒ Premium: - is the offer of an article free of cost or at a nominal price on the purchase
of a specified product. It helps to increase the immediate sales.
ƒ Trading or bonus stamps: - are issued by retailers to customers who buy goods from
them and its purpose is to increase customer loyalty. The number of stamps given to a
buyer depends upon the amount of purchases made by him.
ƒ Point of purchase materials: - include banners, signs, photos, posters and other in-
store promotional tools. They are demonstrated or displayed at the place where the
customer makes actual purchases as they remind them about the brand name and
promote impulsive buying.
ƒ Prize contests :- under it, consumers are given rewards for analytical or creative
thinking about the products in the form of slogan writing, sentence completion,

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 problem solving quiz, etc. It helps to create consumers' interest in the products,
provide new ideas for advertising and may reveal buying motives.
ƒ Trade fairs and exhibitions: - are an important technique of sales promotion as they
have wide appeal .These helps in introducing the firms and their products to the
public at large. Under this, business firms are allotted stalls wherein they display or
demonstrate their products.
ƒ Merchandising aids: - refers to the services provided to induce commercial buyers to
purchase goods in large quantities. It includes training in stores layout and inventory
control, advertising, product demonstration, etc.
ƒ Clearance sale:-at reduced prices may be organized on important festivals or other
occasions. Such sales attract a large number of customers and help to clear
accumulated stocks.

1.2 Reasons for increased focus on sales promotions

The absolute and relative growth in promotional activities can perhaps be explained
by the following considerations (Blattberg and Neslin 1990, pp. 15-17, Bradley 1995, pp.
835-836, Foekens 1995, Kotler 1997, p.666):

• The number of brands has increased. For manufactures, it becomes more difficult to
draw attention from consumers, marketing intermediaries, and retailers. As a result,
manufactures make greater use of promotions to attract the attention of target groups;

• Competitors use promotions frequently. It is difficult for one manager to stop offering
sales promotions, since consumers may switch to other brands that continue offering
deals. As a result, many manufactures face a prisoner’s dilemma (see section 1.2);

• Many brands are in parity; hence, it is difficult to position brands with advertising
messages only. Therefore, sales promotions are employed to support or supplement
advertising campaigns;

• Sales promotion are frequently used to introduce new products, i.e., to obtain shelf
space for these products. With the large increase in new-product introductions in
recent years, there has been a similar growth in sales promotion activity;

• Consumers are more focused on sales promotions (see also section 1.3.3);

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 • The trade has demanded more deals from manufacturers. Greater concentration of
channel power in the hands of retailers has increased the pressure on manufactures to
provide broader and wider sales promotion support and allowances;

• It is more difficult to forecast demand for new brands. Retailers and manufactures
often find themselves with excess inventory. As a result they must offer more
inventory- clearing promotions;

• Advertising efficiency could have declined because of rising costs, media clutter, and
lead constraints, i.e., the time it takes before an ad can be placed. Nevertheless, the
amount of money spend on advertising it still increasing, but at a lower rate than the
sales promotion expenditures

• The effects of advertising are much more difficult to determine. Failure to measure
advertising effects adequately leads to an underestimation of its impact (Jones 1986).
This is a probable reason for the steady switch of marketing expenditures from the
long- terms brand building offered by advertising, to the short-term, but apparently
easily measured, sales promotions (Magrath 1988 and Leeflang et al.1999, Chapter 6);

• Simultaneously, many product mangers are under greater pressure to increase their
current sales. Perhaps independent of the profit consequences, managers who are
oriented towards increasing short-term sales for their brands believe that promotion
activities are very effective. We show in this thesis that this thesis that this may be a
myopic perspective.

We note that the growth in promotional activities may affect the applicability of Varian’s
(1980) theory for the existence of promotions (Occasional unpredictable discounts will make
informed customers happy than the usual uninformed customers). Specifically, if the timing
of promotions for a specific item becomes predictable, the fraction of “informed consumers”
may increase. For infrequently purchased items consumers will choose the store with the
lowest price so that high-priced store will lose their customers and be pushed out of the
market. Similarly, consumers will purchase frequently purchased goods only at the time a
given store offers a discount for this item.

On the other hand, the abundant use of sales promotions for many items makes it very
difficult to track activities in many categories. Consumers may then select specific categories

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in which to specialize such that Varian’s theory continue to apply. It is understandable,
however, that the growth of the internet will allow independent agents to provide new service
that capture information for all categories efficiently. The resulting consumer power would
change the attractiveness of promotional activities to both manufactures and retailers.

1.3 Joint manufactures and retailers sales promotion programs

Manufactures and retailers may co-operate in the development of special sales
promotion programs. We mention two of these programs: Efficient consumer Response
(ECR) and tailor- made promotions. ECR is defined as the cooperation of trade partners,
aimed at satisfying consumer needs at the lowest cost for the integrated distribution chain
(Van de Griendt et al.1997). The concept was introduced in 1992 in the USA in a joint effort
by manufacturers and retailers. The prime operating objective of ECR is to integrate trade
parties work together to fulfill customer wishes better, faster, and at lower costs.

The concept of ECR includes “demand management”, supply management”, and

“enabling technologies”. “Demand management” is aimed at commercial processes in the
distribution chain. It includes activities categorized as “efficient promotions”, “efficient
assortment”, and “efficient new-product introductions”. Retailers and manufacturers
cooperate to optimize these three elements using so-called enabling technologies (such as
scanning and electronic data interchange). For “efficient promotions” the ECR concept
requires promotions that simultaneously maximize category revenue / profit for the retailer
and brand revenue / profit for the manufacturer4. “Efficient promotions” requires descriptive
and normative models of promotion effects. For “supply management”, ECR requires
accurate forecasts of effects of sales promotions on sales to both retailers and to consumers,
in order to manage production and logistics based on these forecasts. For “supply
management” we need predictive models of promotion effects. The ECR concept is
becoming increasingly popular.
Tailor – made promotions are sales promotions that are specially developed for a
particular retail chain by a particular manufacturer, and such promotions are developed to suit
this retail chain’s customers. Tailor – made promotions now command a larger share of
promotion expenditures

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The increased importance of tailor-made promotions can be explained by the increased power
of retail chains. If retail chains want to distinguish themselves from others, they may demand
tailor –made promotional offers from manufacturers. Similarly, separate retailers (within
retail chains) may want to obtain special promotional offers from manufacturers, based on
their specific retail environments. This would be a form of micro-marketing, i.e marketing
tailored to a micro-environment.

1.4 Importance of sales promotion effect measurement

The importance of the measurement of sales promotion effects stems from the increased
focus of manufactures, retailers, and consumers on sales promotions.

• Manufacturers spend an increasing amount of money on sales promotions both in an

absolute and in a relative sense.

• The percentage of revenue for retails obtained through sales promotions is substantial

• Consumers decide their purchase behaviour to a larger extent based on sales

promotions

• And finally, given the increasing importance of joint sales promotion programs, it
becomes important to quantify sales promotion effects for both manufacturers and
retailers.
To summarize, sales promotions play an increasing role in today’s market place. The
question is whether this role is warranted.
The management of promotional activities can be improved through careful measurement of
the effects of sales promotions.. source: Foodmagazine (September 1996, pp.23-27).

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1.4.1 Effect measurement in practice

The measurement of sales promotion effectiveness in practice is very limited. Exact figures
are not available.

Due to difficulty in determining the effectiveness of sales promotion, the optimal amount for
the measurement of effects has received far less attention in the practice of marketing.

There are several reasons why the role of sales promotion effect measurement is
limited in practice (based on Buck and Gupta 2000):

• Managers neither have the time nor have the required skills to build (econometric)
models that can measure sales promotion effects. Today’s marketplace is
characterized by rapid changes which leave managers little time for evaluations. In
addition, the measurement of sales promotion effects (or the effects of any marketing
expenditure) requires knowledge about model buildings, data handling, and so forth.
Managers typically lack these skills.

• The software for building marketing models may not be suitable. Some packages are
used friendly (i.e., one can estimate any model) but are inflexible. Others are flexible
(i.e., one can estimate any model) but requires the user to write complex computer
codes;

• Mangers may not want to measure sales promotion effects, since the outcome may be
negative. For example, they may prefer not to know that the effectiveness of past
promotions has been minimal;

• Managers may not have access to date of acceptable quality for measurement. The
collection of data has reached a high level of precision and detail in some fields (such
as in the fast-moving consumer goods branch) due to the use of scanning. On the
other hands, in other fields that available date are still quite sparse. Examples include
the service industry, areas of industrial marketing, and international marketing;

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 • Managers may lack data. For instance, they may not maintain databases with
characteristics of past promotion campaigns. They are even less likely to have
information on the characteristics of past sales promotions by competitors;

• Managers may decide it is too costly to let external market research companies (e.g.,
AC Nielsen or IRI/GfK) do the analyses.

Source : H. Stegenga at Price Waterhouse Coopers consultants, the Netherlands.

Source : A. Boonman at AC Nielsen, the Netherlands.
Source : Promo magazine, July 1997, p.S29

1.4.2 Effect measurement in the marketing literature

There are many studies on sales promotion effect measurement in the marketing literature.
Chandon (1995) refers to hundreds of articles on sales promotions. About 80-100 marketing
scientists around the world are believed to develop models based on scanner data, either at
the store level or at the household level (Bucklin and Gupta 2000). Many of these scientists
focus at least partially on sales promotions.

We do not provide an overview of the complete literature on sales promotions.

Instead, we refer the interested reader to publications that do give an overview.

1. Blattberg and Neslin (1990); this book is devoted to concepts, methods, and
strategies in the field of sales promotions. It summarizes all important publications
on sales promotions up to 1990;

2. Blattberg and Neslin (1993); this chapter provides an overview of sales

promotions models;

3. Foekens (1995, Chapter 3); this chapter provides another overview of sales
promotions models;

4. Blattberg, Briesch, and Fox (1995); this article summarizes the key findings in the
literature up to 1995, provides research issues with conflicting empirical results,
and also identifies issues without empirical research. This article has a strong
management focus, and it provides a basis for this thesis;

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5. Chandon (1995); this overview article has a strong consumer focus. It summarizes
consume- oriented studies aimed at identifying heavy users of promotions and at
tracking their purchases strategies involving the choice of a promoted brand;

6. Van Heerde, Foekens, and Leeflang (1997), Foekens, Van Heerde, Leeflang
(1998), Foekens et al. (1998), and Campo (1998); these articles discuss the sales
promotion literature in Dutch.

Based on more than fifty articles on sales promotion effect measurement, Blattberg,
Briesch, and fox (1995) provide the following empirical generalizations.

• Temporary price reduction substantially increase sales. Empirical research has

found that temporary retail price promotions cause a short-terms sales spike. This
result is fundamental to virtually all research done in the area of promotions;

• Higher Market-share brands are less deal (temporary price discount) elastic.
This, higher share brands have lower deal elasticities, even though higher share
brands may reach a larger proportion of switchers from other brands than lower-
share brands do;

• The frequency of deal changes the consumer’s reference price. This observation is
important since it offers and explanation for the loss of brand equity when brands
are heavily promoted. A lower consumer reference price reduce the premium, that
can be charged for a brand in the marketplace, which results in less “equity”;

• The greater the frequency of deals, the lower the height of the deal spike. Foekens,
Leeflang, and Wittink (1999) find this effect based on varying parameter models.
It is likely to be caused by (1) consumer expectations about the frequency of
deals, and / or (2) changes in the consumers’ reference prices;

• Cross-promotional effects are asymmetric: the promotion of higher quality brands

reduces sale of weaker brands (and private label products) disprortionately. One
possible explanation is that asymmetry is primarily due to differences in brand

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 equity. Other explanations, such as prospect theory, have been offered in the
literature. An extension of this finding focuses on asymmetries in brands’
qualities. It predicts the impact that promoting a brand in one quality tier is likely
to have on consumers who switch from brands in other tiers. Promoting higher-
tier brands generates more switching than does promoting lower-tier brands;

• Retailers pass less than 100 percent of trade deals through. Because retailers are
the vehicle for pass – through of trade promotion allowances to consumers, it is
important to recognize that brands different in the amount of pass- through;

• Display and feature advertising have strong effects on items sales. Displays are
special or separate locations for products. They provide additional in-store
attention. Feature advertising means outside store attention. Feature advertising is
the inclusion of product names and prices in store fliers or newspapers
advertisements;

• Promotions can affect sales in complementary and substitute categories. Although

this possibility is recognized by practitioners, the magnitude of this effect is rarely
understood. The sales effect of promoting an item in one category on items in a
complementary category is likely a function of the characteristics of the
categories. For example, the promotion of a spaghetti sauce may also increase the
sales of some spaghetti items. On the other hand, the promotion of an ice cream
brand may reduce the sales of other dessert items.

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1.4.3 Research issues in sales promotion effect measurement

Blattberg, Briesch and Fox (1995) enumerate a number of issue with conflicting, litter, or no
empirical results in the marketing literature on sales promotions:

1. The shape of the deal effect curve: The deal effect curve shows the relationship
between the percentage promotional price discount and the sales of the brand that
is price promoted. Is the deal effect curve linear, concave, convex, or S-shaped?
Litted is know about the shape of the deal effect curve, even though the shape is
critical for the determination of ‘optimal” dealing amounts. For example, if the
shape is convex (i.e., deals have increasing returns), then the firm will run deeper
discounts than if the effect is concave (i.e., decreasing returns), everything else
being equal. Some argue that the curve has an S-shape, with increasing returns
over some range and decreasing returns at higher deal discounts. The argument is
based on the belief that consumer can stockpile only a certain amount, after which
their storage and holding costs are too high;

2. Checking for troughs after the deal. This effect has been surprisingly difficult to
find. The early literature (Blattberg et al.1981, and Neslin, Henderson, and Quelch
1985) found evidence of purchase acceleration and stockpiling, but later studies of
aggregated purchased date do not seem to find a “post promotion dip”.

3. The majority of promotional volume comes from switchers. Totten and block
(1987) and Gupta (1988) find that the majority of promotional volume comes
from switchers. However, Vilcassim and Chintagunta (1992) and Chintagunta
(1993) find that more promotional volume comes from category expansion than
from switchers. The latter results is consistent with observations that the sum of
cross-price elasticities is much smaller than the absolute value of own-price
elasticities (Bemmaor and Mouchoux 1991) which implies that much promotional
volume is not gained at the expense of other brand;

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 4. Effect of category expansion of deals: With increasing importance being placed on
category management, this question becomes critical for practitioners to
understand. Manufacturers and retailers are very interested in the circumstances
under which category expansion occurs and what causes it;

5. The magnitude of impact of display, feature advertising and price discount on

sales promotion: In the marketing literature, few empirical results have been
generated regarding the synergies between feature advertising, displays, and price
discounts. This is very important for both retailers and manufacturers because (a)
they should determine the trade spending of manufacturers, and (b) they should
influence the way retailers allocate display and feature advertising space. If there
are synergies, then manufactures should focus on obtaining joint merchandising
with the retailers, and retailers should focus on using these merchandising tools to
maximize their returns.

Bucklin and Gupta (2000) identify important issues in the area of sales promotion based on
interviews with marketing practitioners (managers and researchers). They study the
commercial use and adoption of state-of-the -art methods for analyzing scanner data by
packaged consumer goods manufactures in the USA. They conducted wide-ranging in-person
interviews with 41 executives from 10 data suppliers, packaged goods manufactures, and
consulting firms. They conclude that the application of analytical methods to scanner data has
yielded some notable successes in marketing mix decision making, particularly in consumer
and trade promotions. However, the interviewees suggest that the following research issues in
the area of sales promotion and pricing remain:

1. Price threshold. If a brand has an own-price elasticity of -2, a 10 percent decrease

in its price should increase its unit sales by 20 percent. Many managers, however
believe the such effects are unlikely to occur unless the price decrease crosses a
certain threshold. In other words, response to price changes are “sticky” over
certain ranges of price;

2. No post promotion trough. Most practitioners indicated that they do not find post
promotion dips in their data. Many therefore believe that promotions do not have
negative effects in subsequent time periods;

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3. Baseline and incremental sales. Research is needed to develop simple, robust
models that will produce better estimates of sales that are truly incremental for the
manufacturer, not borrowed from the future, from another store, or from a sister
brand;

4. Need for account-level analysis. The managers indicate they prefer analyses at the
account level rather than analyses at the market level, since the account level is
used for many decisions.

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